As a consequence of frequent contacts with the boards of directors—and departments which are responsible for investments—of pension funds and other institutional investors the inventors of the invention have made an in-depth study of the current investment problems for institutional investors in The Netherlands.
It can be concluded that all subscribe to the following statement of the problem: “How can I, apart from the existing investment alternatives, invest my capital such that it holds its value (is inflation-proof) and at the same time increase my yield and reduce the costs, time and attention to be expended on overall management of the capital”.
A description of the current state of affairs, the investment products, the results, the trend and the problems is given in broad outline below.
Current Situation
Pension holdings in The Netherlands amount to more than one thousand billion guilders (where ‘billion’ is interpreted here and below as ‘one thousand million’). These holdings are managed by pension funds with the aim of investing the pension holdings such that they hold their value (are index-linked) (inflation-proof) so that those entitled to a pension ultimately receive an (index-linked) pension at any point in time in the future.
It has been calculated that if the pension funds achieve a yield of 4% plus the rise due to inflation they are able to meet this aim and also to cover the costs of their organisation.
In order to achieve this “4%+inflation cover” the funds to be invested are roughly invested in three ways:                in bonds (government loans)—in general a somewhat lower but certain yield        in shares—in general a higher yield, but with higher risk        in property—in general a yield between that from bonds and shares, but with inflation cover.        
Detailed study of these three different investment products has taught us that the major difference between government loans and shares, on the one hand, and property, on the other hand, is the inflation component. After all, since in The Netherlands the rents for offices, shops and other commercial property increase annually by the percentage inflation, by means of an “index clause” included as standard in the lease, and this is by and large also the case for residential lettings, this means that the investment in property offers a yield that gives inflation cover. An additional factor here is that the higher the inflation the higher are the rents and the greater is the increase in value of property. In short, investments in property in general react positively to inflation.
The pre-set yield on government loans suffers under inflation and investment in government loans therefore implies an inflation risk.
This also applies in the case of investment in shares. Higher inflation fuels rises in wages and salaries, which can have an adverse consequence on profits, with a fall in the share value as a result.
In short, investments in government loans and shares in general react negatively to inflation.
So why do pension funds—which in particular fear (high) inflation—not invest in property? The reasons for this are as follows:                Good property—correct price/yield ratio—is scarce and therefore, in contrast to shares, for example, is not available for the investment of billions at any point in time.        Property is also not as liquid as, for example, government loans or shares.        Investments in property react well to inflation only if there is (virtually) full occupancy. Good management is required to avoid premises standing empty. Good management is scarce and expensive.        The costs of managing property are many times higher than those for government loans and/or shares. Owning property costs a great deal more time and attention (changing tax legislation, maintenance, collection charges, rent review procedures, property standing empty, etc.) than does the possession of, for example, a share portfolio. In this context, both those who own property and those who own shares must continue accurately to monitor market trends in relation to their investment.An Overview        
Currently in excess of one thousand billion guilders are invested in The Netherlands, as is shown diagrammatically in FIG. 1. The average yield over a period of 30 years is approximately 5% per year for government loans, approximately 12% per year for shares and approximately 6%+inflation cover per year for property. FIG. 1 also indicates where pension funds expend most costs, time and attention.
Pension Funds, Investment Results: an Area of Tension
Developments over (just) the last 5 years have led to the investment results achieved by the pension funds being compared with one another and to the introduction of so-called “benchmarking”. The investment results are looked at to determine which pension funds have a better or poorer performance than the average investment results achieved by the funds. If a better than average investment result is achieved, this is frequently dismissed as “luck”, but if a poorer than average investment result is achieved this is penalised, certainly if this is the case 3 years in succession. Those entitled to a pension may then (collectively) decide to switch to a different fund which has better investment results.
The above encourages all funds to invest in virtually the same way. After all, if they all do the same no one is doing any worse than another. In the case of investments in government loans and shares this is relatively easy to do, via, for example, the funds quoted on the Amsterdam stock exchanges. Investment in property precludes this since, by definition, the ownership of each property is different.
A gap, or area of tension, is therefore opening up between the boards of trustees of pension funds and the management (executive board) of those funds, a management that has under-performed (i.e. has achieved investment results below the benchmark) for one or two years, for whatever reason, being under, or being placed under, great pressure.
Having due regard for all the above, it is virtually impossible for management to catch up lost ground compared with the results achieved by other funds, unless better results can be achieved by means of large property transactions, but this is not very probable.